V-Shaped Stock Recovery?
Weekly Investment Update | By Brian Schreiner
After “Liberation Day" on April 2, the day President Trump announced his reciprocal tariff strategy, claiming “economic independence” for the United States, yields on 10-year U.S. Treasury bonds skyrocketed 49 basis points in one week; the largest five-day price decline in twenty years.
The Trump administration will never admit it, but the bond market is what caused them to backtrack on their hardline tariff stance. The bond market patently rejected Trump’s policy. If you want to understand how and why this happened, watch this excellent exposé from Bloomberg Originals: How Bond Vigilantes Made Trump Blink.
I believe this is by far the most important development in the global financial markets so far this year; more important than the trade wars themselves. The Treasury market is the foundation of our financial system and last month it was shaken.
Since then, investors and the media have latched on to the fact that Trump has softened his tariff stance and negotiations seem to be going relatively well, with the exception of China, but the real economy is slowing. In last month's Quarterly Outlook, we estimated the risk of recession as above 50%. With confirmed negative GDP growth in Q1, the risk of recession is now probably around 70%.
The V-shaped recovery that has followed the sell-off in early April suggests the stock market is not pricing-in the higher likelihood of economic recession and investors are betting that the ever present monetary or fiscal stimulus backstop will be there.
That gamble has paid off every time in recent history, but the Fed has spent the last two decades painting itself into a corner with ultra-low interest rate policy and expanding its balance sheet, both at unprecedented levels. On the fiscal side, the bond market has clearly announced that the U.S. government should be in austerity mode.
Stimulus is not likely anytime soon and in the meantime, investors holding large allocations to U.S. growth stocks have some serious questions to answer.
Those questions will be answered soon with the release of more hard economic data that will wake investors up with the realization that the economy is slowing significantly and the abilities of the Fed and fiscal authorities are extremely limited. We expect the V-shaped recovery of the past few weeks to end up looking more like a W. α
Alpha Rock Sourcebook
Some of you have asked about the research and analysis behind our investment strategies, so we have created a sourcebook with a fairly comprehensive list (with links!) to our go-to resources.
If you monitor the financial markets I think you will find the sourcebook valuable. If you’re just curious, I think you will find it interesting. Either way, if you’d like a copy, email me.
Interesting things I came across this week…
Infographic: All 188 Cognitive Biases (Visual Capitalist)
BlackRock to Tokenize Shares of $150B Fund (Coindesk)
45% of American imports are inputs to American exports (Larry Summers)
Solo Advisor’s Rule! (WealthManagement.com)
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